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What’s the Difference Between Invoice Factoring and Discounting?

On the face of it, invoice factoring and discounting are very similar financial services. Both allow businesses of all shapes and sizes to increase their cash flow by unlocking the funds lying dormant in their unpaid invoices. Both times the financier will offer credit that is a percentage of the funds tied up in invoices.

However, there are a number of ways in which the two differ.

How invoice factoring and discounting differ

When a business agrees to use invoice factoring, it will receive a percentage (usually around 75%) of the invoice due to them in cash from the invoice factoring company. The invoice factoring company will then take on all the responsibilities related to getting the cash from the debtor. It will be their duty to interact with debtors and process the payments.

However, an invoice discounting service doesn’t offer that service. Control of the sales ledger, and the responsibility for sourcing payment from the debtor, will remain with the initial client.

Whereas invoice factoring offers the lender an opportunity to make a profit by buying an unpaid invoice in part and retrieving the payment in full, invoice discounting more represents a loan against the value of the invoice.

When should you use factoring?

Many companies, particularly smaller enterprises, find it hard to dedicate the time, money and effort that’s necessary to collect payments from some clients find that invoice factoring is the best option for them. This allows them to increase cash flow and concentrate on running their business.

However, because a third party will act on your behalf, a contract will be drawn up and relevant parties may be able to see that you’re dealing with a factoring company.

When should you use discounting?

Generally speaking, larger companies that have dedicated departments that deal with invoices and client debts find that it’s more cost-effective to get the job done in house because of the fees that are often inherent in factoring services. Also from a reputation perspective, some companies like to keep quiet about getting help with their cash flow.

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